Monthly Economic Report

Transcription

1 Monthly Economic Report August 21, 2018 Copyright Mizuho Research Institute Ltd. All Rights Reserved.

2 1. Overview of financial markets: US stocks resilient despite rising concern over US-China trade friction The yield on 10yr US treasury bonds fell to the lower 2.8%-level amid rising concerns over US-China trade friction. While stock prices dropped globally, US stocks remained resilient against the backdrop of strong upward momentum of corporate earnings. The upside of Japanese stocks appears heavy due to uncertainties surrounding domestic politics and the state of the economy. Yen interest rates rose to the 0.1%-level after the BOJ made flexible adjustment in its yield curve control. The US dollar remains strong amid selling in emerging market currencies and stocks. [ Major market trends ] Note: Currency exchange rates are based upon BOE Nominal effective exchange rate Source: Made by MHRI based upon Bloomberg 1

3 Turkish lira tumbles on deteriorating ties with US The Turkish lira dropped sharply in mid-august against the backdrop of deterioration in its relations with US over the detention of a US pastor. In Turkey, plagued with a current account deficit and high inflation, the lira has been weakening over the past five years. As the pace of the currency s decline quickened after the turn of the year, the lira came under accelerating selling pressure upon a worsening in US-China relations. Press coverage on the ECB s concerns regarding euro zone banks exposure to Turkey also accelerated the lira s fall. Turkey is trying to defend the lira by, among others, raising market interest rates. However, continuous caution is required as Turkey appears hard pressed for foreign currencies. [ TRY/USD exchange rates ] [ Ratio of foreign funds required to forex reserves ] Nikkei reported Pakistan is expected to request IMF s support (August 1). Argentina, short on foreign currencies, already requested IMF s support in May (approved in June). Foreign currency shortage Source: Made by MHRI based upon Bloomberg Note: 1. Foreign funds required = Current account deficit + Repayments of short-term debt 2. Short-term debt repayments and current account deficit are based on the averages of IMF forecasts for The ratio of foreign funds required on the basis of 2 to the latest foreign exchange reserves is shown graphically. Source: Made by MHRI based upon IMF 2

4 But the Turkish lira shock s impact appears limited in terms of the international credit structure An issue of concern is a global spread of the Turkish lira shock. However, even for Spanish financial institutions with large credit exposures to Turkey, the ratio of credits to Turkey to overall credits is only around 2% and the credit exposure to Turkey is also barely 5% of overall international credits. From what can be seen in the international credit structure, the spillover effect of falling Turkish bond prices appears to be limited. [ International credits to Turkey ] [ Spain s credit structure ] Source: Made by MHRI based upon BIS Source: Made by MHRI based upon BIS 3

5 2. The US economy and financial market trends: real GDP keeps robust growth in Apr-Jun quarter Real GDP grew 4.1% q-o-q p.a. in the Apr-Jun quarter, sustaining robust expansion. The strong growth was led by domestic demand. Business investment posted high growth for two consecutive quarters. Tax cuts supported investment in machinery and intellectual property assets. Investment in oil drilling grew, reflecting high crude oil prices. Personal consumption recovered from slackness in the Jan-Mar quarter, helped by an increase in disposable income, propped up by tax cuts and rise of wages. Even though exports saw high growth, this was due mainly to a sharp rise in agricultural products. This indicates moves to skirt the imposition of punitive tariffs against China. (Y-o-y % change) [ Real GDP growth rate ] Government spending Inventory investment Housing investment Real GDP Net exports Business investment Personal consumption Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q (yyyy) Source: Made by MHRI based upon US Department of Commerce 4

6 Business conditions remain robust, businesses concerned over higher production cost due to US trade policy The business condition was firm, with core capital goods showing uptrends for both supplier deliveries and new orders. The July ISM manufacturing index came to 58.1, falling for the first time in three months. All items other than inventories and employment dipped. Businesses are concerned regarding the rise of procurement costs regarding iron & steel and aluminum and rise of production costs, due to the government s trade policy. In June, new orders and shipments of core capital goods continued to follow an uptrend. (Base = 50) [ ISM manufacturing index ] [ Core capital goods ] (2013 = 100) New orders Shipments (m/yyyy) Source: Made by MHRI based upon US Institute for Supply Management Source: Made by MHRI based upon US Department of State (m/yyyy) 5

7 Payrolls maintains robust uptrend. While the unemployment rate fell to the 3%-level, wage rises remain moderate Nonfarm payrolls in July increased 157 thousand m-o-m. The strong uptrend remains intact, as the past data was revised upward. The unemployment rate in July, at 3.9%, declined to the 3% level again. With the labor force population also rising, the employment situation is continuing to improve. Hourly wages rose +0.3% m-o-m (+2.7% y-o-y), showing that the pace of wage increases remains moderate. Automobile sales in July came to million vehicles (p.a.), falling below 17 million vehicles for the first time in five months to indicate a moderate downtrend. 350 [ Nonfarm payrolls and unemployment rate ] (M-o-m change, thousand people) 5.5 (annual rate, million vehicles) 19 [ Automotive sales (number of vehicles) ] million vehicles (m/yyyy) Source: Made by MHRI based upon US Department of Labor Source: Made by MHRI based upon Autodata (m/yyyy) 6

8 Inflation rate staying near 2% Various inflation indicators are staying close to 2%. Growth of hourly wages remains more or less flat. In July, the core CPI rose +2.4% y-o-y, somewhat accelerating but remaining in the vicinity of 2%. The higher core CPI is mainly attributable to rising housing costs. Prices of goods also rose moderately. In June, the core PCE deflator rose +1.9% y-o-y, marginally slowing from the previous month. The previous month s data was revised, falling short of 2%. (Y-o-y % change) [ Hourly wages and inflation rate ] Source: Made by MHRI based upon US Department of Labor, Bureau of Labor Statistics (m/yyyy) 7

9 US monetary policy: FRB maintains rate hike stance in light of solid economic conditions and price stability The FOMC kept the federal funds rate unchanged in August. At the next FOMC meeting in September (September 25-26), a rate hike of 0.25% is expected. The FOMC statement showed no change in its forward guidance or its comment on the stance of monetary policy. The stance of monetary policy remains accommodative, further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, and the FOMC s assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. A rate hike is likely at the FOMC in September. Watch for possible changes in its statement and its outlook for the federal funds rate. Points to watch for: What will become (deletion) of the phrase of accommodative, a possible change in the expected path of the federal funds rate in 2019, and the outlook for 2021 to be newly added. The theme of the Economic Policy Symposium in Jackson Hole on August was the Changing Market Structure and Implications for Monetary Policy. [ Policy rate outlook (June) ] Source: Made by MHRI based upon FRB 8

10 US bond market: while the yield on 10yr US treasury bonds should trend around 3%, a decline in investors risk tolerance must be watched closely Amid a mixture of factors pushing up and down interest rates, the yield on US treasury bonds moved in a narrow range around 2.9%. While the solid US economy and the easing of supply and demand due to the increase of treasury bond issuance and the FRB s balance sheetreduction stance served to push up interest rates, concerns regarding US-China trade friction and the weakening of emerging market (EM) currencies pushed down interest rates. The UST yield is likely to rise due mainly to supply-demand easing. But watch for a possible decline in investors risk tolerance amid rising uncertainties over the economic outlook stemming from the deterioration of US-China relations and a narrowing of the UST long-short spread. [ 10yr UST yield and expected inflation rate ] [ UST long-short spread ] Source: Made by MHRI based upon Bloomberg Note: The shaded areas indicate recessions Source: Made by MHRI based upon Bloomberg 9

11 US stock market: likely to swing up and down near term over US-China trade talks Encouraged by strong earnings improvements in the Apr-Jun quarter, the Dow Jones Average kept rising and recovered to levels in the higher half of the 25,000-level. Despite occasional drops due to concerns over deteriorating ties with Turkey and the slowing Chinese economy, the underlying strength remains intact. In the short run, stock prices may swing sharply up and down over trade talks between the US and China, but there are no signs of a sense of overvaluation rising, potentially limiting the downside. On the other hand, stocks may rise sharply once uncertainties recede. [ Sentiment among US institutional and individual investors ] [ Expected PER of S&P500 index companies and yield spread ] Source: Made by MHRI based upon Bloomberg Note: The yield spread is obtained by deducting the dividend yield of S&P 500 index companies from the 10yr UST yield. Source: Made by MHRI based upon Thomson Reuters 10

12 3. The European economy and financial market trends: economic expansion continuing in July and onward The improvement in business sentiment continued uninterruptedly during summer. The core inflation rate moved sideways on average. Eurozone GDP growth in the Apr-Jun quarter came to +0.4% q-o-q, roughly on par with the Jan-Mar quarter. The latest GDP data indicates that the domestic demand-led underlying strength of the Eurozone economy is being sustained. While the Eurozone synthetic PMI declined in July (from 54.9 in June to 54.3 in July) but remained at a high level, indicating the continuation of economic expansion during summer. Companies remain positive about new hiring, leading to expectations of economic expansion supported by increased employment going forward. In the Eurozone. the inflation rate stood at +2.1% y-o-y in July, rising further from June (+2.0% y-o-y), with energy prices particularly higher. The core inflation rose at +1.1% y-o-y in July (June: +0.9% y-o-y), perhaps under the impact of temporary factors. [ Eurozone: PMI ] [ Eurozone: Inflation rate ] Source: Made by MHRI based upon Markit Note: Core inflation rate is the general value excluding energy, foods, and certain other items Source: Made by MHRI based upon Eurostat 11

13 The ECB will likely keep monetary policy unchanged, with the first rate hike expected after autumn 2019 The ECB is most likely to keep its current monetary policy stance unchanged for the time being. The ECB is unlikely to change its monetary policy for the time being, with a host of political events waiting from autumn The ECB maintains a wait-and-see stance on Turkey. The first rate hike is expected to be an increase of the deposit facility rate (currently -0.4%) in autumn However, the rate hike may be pushed back depending on inflation-related data. At present, unit labor cost is showing moderate growth. The ECB released its analysis in the August Economic Bulletin that rising wage growth is expected also to lead to upward pressures on prices. Compensation per hour worked is moderately accelerating the pace of increase. [ Monetary policy outlook ] [ Eurozone unit labor productivity ] Note: Core inflation rate is the general value excluding energy, foods, and certain other items Source: Made by MHRI based upon Eurostat, ECB Source: Made by MHRI based upon ECB 12

14 European bond market: German interest rates are likely to remain at a low level for the time being due to fading prospects of a rate hike and concern over Italy s fiscal instability The yield on 10yr German government bonds traded at a low level of 0.3%, following the ECB Governing Board s decision in June to keep its policy rates unchanged. The yield on 10yr German government bonds rose in tandem with the rise of the JGB yield. However, the German bond yield fell again amid concerns over Italy s fiscal expansion policy and worries over the spillover effect on the financial sector of the Turkish lira s sharp fall. Given sluggish price rises and the ECB s reinvestment policy, the yield on 10yr German government bonds is likely to stay low for the time being. As Italy is expected to face tough going in negotiations on the next fiscal year s budget, the spread with the yield on 10yr German government bonds is vulnerable to further widening pressure. [ German 10y government bond yield and real interest ] [ Spread with 10y German government bond yield ] Source: Made by MHRI based upon Bloomberg Source: Made by MHRI based upon Bloomberg 13

15 4. The Chinese economy and EM market trends: moderate economic slowdown In July, major economic indicators continued their moderate slowdown, centering on those for domestic demand. While the value of exports maintained double-digit growth, investment in fixed assets slowed to an increase of +3.0% y-o-y, due to wider negative growth of infrastructure investment. The growth of retail sales also slowed somewhat, reflecting poor sales of home electric appliances. In all, the Chinese economy is slowing down moderately, dragged down mainly by sluggish domestic demand. In the wake of intensifying trade friction, the Chinese government unveiled a policy to further boost the economy with monetary and fiscal measures. The economic slowdown is likely to stay moderate going forward. On the other hand, higher increases in home sales, prices and investment are feared to rekindle a sense of overheating. The government is continuing to move in the direction of tightening housing restrictions. [ China: major monthly economic indicators ] [ Monetary policy ] Measures discussed at Political Bureau meeting on July 31 Firmly maintain a prudent ( previously, prudent and neutral ) monetary policy Maintain control over the floodgates of monetary supply. ( previously, maintain management ) Keep liquidity at a reasonable and ample ( previously, reasonable and stable) level. Steps taken since the turn of the year The reserve deposit ratio lowered three times (January, April and July). The PBOC offered some 500 billion yuan of Medium-Term Lending Facility credit in July. Note: Exports are in nominal terms and denominated in US dollar Source: Made by MHRI based upon National Bureau of Statistics of China and General Administration of Customs (China) Source: Made by MHRI based upon People's Daily Online (August 1, 2018), CPC Political Bureau Meeting, etc. 14

16 EM market trends: the Turkish lira shock triggers the rise of concerns over EM markets In the wake of the Turkish lira s tumble, currencies declined in some emerging markets. Currencies also fell in Russia, whose ties with the US deteriorated following additional US sanctions, and South Africa, Argentine and Brazil, all of which are running large current-account deficits. Stock prices also continued their drop in Turkey. The downtrend of Turkish stocks are particularly pronounced along with Chinese stocks. Even though the global impact of the Turkish lira s tumble appears limited for now, it will be necessary to keep a close eye upon future developments along with US-China trade friction. [ Rise and fall vs USD ] [ EM stock market trends ] Source: Made by MHRI based upon Bloomberg Source: Made by MHRI based upon Bloomberg 15

17 5. The Japanese economy: real GDP in the Apr-Jun quarter posts the first positive growth in two quarters Japan s real GDP grew +0.5% q-o-q (an annual rate of +1.9%) in the Apr-Jun quarter 2018, posting the first positive growth in two quarters. Personal consumption turned up to post the first big positive growth in two quarters, reflecting a pause in the sharp rise of fresh food and an increase in summer bonuses. Capital investment rose for seven consecutive quarters, the first since the bubble economy era, indicating that Japanese companies appetite for investment remains strong. External demand contributed negatively to GDP growth for the first time in two quarters because of slower growth of exports. Even so, exports of goods stayed robust, centering on capital goods. All in all, real GDP in the Apr-Jun quarter recouped the setback in the Jan-Mar quarter and demonstrates the uninterrupted economic recovery in Japan. [ 2018 Apr-Jun GDP (First Preliminary Quarterly Estimates of GDP (1 st QE)) ] Note: The readings in the right table are q-o-q change in real terms unless otherwise stated. The figures in parentheses indicate the contributions to GDP growth rate. Source: Made by MHRI based upon Cabinet Office, First Preliminary Quarterly Estimates of GDP Apr-Jun Jul-Sep Oct-Dec Jan-Mar Apr-Jun GDP (real) (Q-o-q change, p.a.) (Y-o-y change) Domestic demand (0.8) (0.0) (0.3) (-0.3) (0.6) Private demand (0.5) (0.1) (0.4) (-0.3) (0.5) Personal consumption Housing investment Capital investment Inventory investment (-0.1) (0.4) (0.1) (-0.2) (0.0) Public demand (0.3) (-0.1) (-0.0) (-0.0) (0.0) Government consumption Public investment External demand (-0.3) (0.6) (-0.1) (0.1) (-0.1) Exports Imports GDP (nominal) GDP deflator (Y-o-y change)

18 Despite the pickup of exports and production, they still lack strength Even though real exports rose 0.3% m-o-m in July (June: -0.5% m-o-m), recording the first increase in three months, they still lack strength. It is assumed that exports of automobiles weakened, centering on US-bound shipments. Real exports may have been also influenced by the suspension of plant operations due to heavy rains in Western Japan. Industrial production decreased 1.8% m-o-m in June (May: -0.2% m-o-m) registering the first drop in two months. Production decreased for general-purpose, production and business oriented machinery. For the Apr-Jun quarter, industrial production rose 1.3% q-o-q (Jan-Mar quarter: -1.3% q-o-q), picking up for the first time in two quarters. While production plans point to large production increases during the July-August period, actual production will most likely be revised downward because the plans do not reflect the impacts of the devastating torrential rains in Western Japan. [ Real exports ] [ Industrial production index ] Source: Made by MHRI based upon Bank of Japan, Real Exports and Real Imports Source: Made by MHRI based Ministry of Economy, Trade and Industry, Indices of Industrial Production 17

19 Employment conditions remain favorable and growth of real wages accelerated due to the rise of summer bonuses While the unemployment rate rose to 2.4% in June from 2.2% in May, the rise largely reflected a backlash to the decline in May. The labor market conditions can be judged as favorable. The number of employed persons decreased by approximately 410 thousand m-o-m, decreasing for three months in a row. It appears that there is a pause in the increase of self-employed persons and employment of females. However, for the Apr-Jun quarter, however, the number of employed persons increased by approximately 210 thousand q-o-q, rising for 12 consecutive quarters. The active job openings-to-applicants ratio also stands at the highest level since January Real wages in June rose 2.8% y-o-y, accelerating from the pace of 1.3% y-o-y in May. But it should be noted that the sample bias is rather large. Given the increase in summer bonuses, special cash earnings in June posted strong growth of 7.0% y-o-y, increasing dramatically from a year ago (0.4% y-o-y). Real wages in June rose only 0.9% y-o-y when excluding the impact of revisions to the way statistics are prepared. Thus, some leeway should be considered when viewing the recent pace of wage increase. [ Unemployment rate and number of employed persons ] [ Real wages ] Note: Seasonally-adjusted Source: Made by MHRI based upon Ministry of Internal Affairs and Communications, Labour Force Survey Source: Made by MHRI based upon Ministry of Health, Labour and Welfare, Monthly Labour Survey 18

20 Personal consumption robust, July core CPI in the Ku-area (wards) of Tokyo rose faster than in June but price rises other than energy slowing The Consumption Activity Index rose+0.3% m-o-m in June, picking up for the first time in two months (May: -1.2% m-o-m). Consumption increased for non-durable goods such as clothing, and durable goods, reflecting the favorable weather in June and increases in summer bonuses. In the Apr-Jun quarter, the index grew +0.4% q-o-q for the first rise in two quarters, indicating that personal consumption is following firm footing. In July, core CPI in the Ku-area of Tokyo rose +0.8% y-o-y, quickening the pace of increase from June (+0.7% y-o-y). Price movements excluding energy also showed similar trends. Food excluding fresh food (eating-out and alcoholic beverages, etc.), clothes and imputed rent pushed up the core CPI. While the core CPI is expected to widen the increase moderately against the backdrop of rising crude oil prices and labor costs, decreases in communication charges are likely to check the increase. [ Consumption Activity Index (real, travel balance adjusted) ] [ Ku-area of Tokyo core CPI (general, excluding fresh food) ] Note: The solid line indicates the moving average of the past three months Source: Made by MHRI based upon Bank of Japan, Consumption Activity Index Source: Made by MHRI based upon Ministry of Internal Affairs and Communications, Consumer Price Index 19

21 Japanese monetary policy: introduced flexibility in the yield curve control at the July MPM The BOJ effectively gave up on achieving the price stability target within the forecast period, shifting focus to enhancing the sustainability of monetary policy and maintaining momentum of prices. At the Monetary Policy Meeting (MPM) on July 30-31,the BOJ decided on steps to help enhance the sustainability of policy, introducing some flexibility into its yield curve control and ETF purchases. In the Outlook for Economic Activity and Prices, the BOJ lowered price forecasts up to FY2020. BOJ Governor Kuroda stated that it would be difficult to achieve the price stability target within the forecast period. The BOJ is expected to maintain the current monetary policy until the consumption tax hike by introducing the forward guidance for policy rates. Thereafter, the BOJ is likely to gradually move toward rate hikes within the bounds where it can maintain momentum of prices. [ BOJ Outlook for Economic Activity and Prices (July 2018) ] Fiscal 2018 Forecasts made in April 2018 Fiscal 2019 Forecasts made in April 2018 Fiscal 2020 Forecasts made in April 2018 Real GDP +1.3~+1.5 (+1.5) +1.4~+1.7 (+1.6) +0.7~+0.9 (+0.8) +0.7~+0.9 (+0.8) +0.7~+0.9 (+0.8) +0.6~+1.0 (+0.8) CPI (all items excluding fresh food) +1.8~+2.1 (+2.0) +2.0~+2.3 (+2.3) +1.9~+2.1 (+2.1) +2.0~+2.3 (+2.3) +1.0~+1.2 (+1.1) +1.2~+1.3 (+1.3) (Y-o-y % change) Excluding the effects of the consumption tax hike +1.3~+1.6 (+1.5) +1.5~+1.8 (+1.8) +1.4~+1.6 (+1.6) +1.5~+1.8 (+1.8) Note: Forecasts of the majority of Policy Board members. Figures in brackets indicate the medians of the Policy Board members forecasts. Source: Made by MHRI based upon Bank of Japan Forward guidance for policy rates Flexible yield curve control Asset purchases Change in the size of the policyrate balance Source: Made by MHRI based upon Bank of Japan [ Key policy changes ] The Bank intends to maintain the current extremely low levels of short- and long-term interest rates for an extended period of time, taking into account uncertainties regarding economic activity and prices including the effects of the consumption tax hike scheduled to take place in October The Bank will purchase Japanese government bonds (JGBs) so that 10-year JGB yields will remain at around zero percent. While doing so, the yields may move upward and downward to some extent mainly depending on developments in economic activity and prices. With regard to the amount of JGBs to be purchased, the Bank will conduct purchases in a flexible manner so that their amount outstanding will increase at an annual pace of about 80 trillion yen. The Bank will purchase exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) so that their amounts outstanding will increase at annual paces of about 6 trillion yen and about 90 billion yen, respectively. With a view to lowering risk premia of asset prices in an appropriate manner, the Bank may increase or decrease the amount of purchases depending on market conditions. The Bank, under the condition that yield curve control can be conducted appropriately, will reduce the size of the Policy-Rate Balance in financial institutions' current account balances at the Bank -- to which a negative interest rate is applied -- from the current level of about 10 trillion yen on average. 20

22 Japanese long-term yields: 10yr JGB yields likely to be ranged-bound around 0.1% The range of 10yr JGB yields shifted upward and moved around 0.1% following the BOJ s decision to introduce some flexibility in its management of yield curve control. Even though the BOJ indicated its stance of tolerating the 10yr JGB yield s rise up to +0.2%, it failed to sustain the upward momentum of interest rates due to concerns over US-China trade friction and other factors. The annual increase in the BOJ s JGB purchases was reduced to less than JPY 40 trillion. The BOJ is likely to maintain the current pace of JGB purchases going forward. Since the current pace of JGB purchases is close to the level of new JGB issuances at around JPY 30 trillion, this is considered as a sustainable level. [ 10yr JGB yield ] [ Yield curve ] Source: Made by MHRI based upon Bloomberg Source: Made by MHRI based upon Bloomberg 21

23 Japanese stock market: the upside remains, but hard to make moves pending developments related to the US and China The Nikkei 225 Average moved in the upper half of the 22,000-yen level in July as overseas investors turned net buyers amid rising expectations of better business performance in the wake of the yen s weakening and earnings results. However, the stock average broke below 22,000 yen briefly as global risk aversion came to the fore again over developments about Turkey and the Chinese economy. Despite some recovery, the upside appears heavy in part due to a sense of caution over the direction of new Japan-US trade talks. Following the Apr-Jun quarter corporate earnings results, analysts revising their earnings estimates upward generally outnumber pessimists. With the expected PER still in the lower half of the 13 times level, the upside appears to remain intact. In the immediate future, however, investors are unlikely to move significantly either way, hoping to see what will become of US trade policy and the Chinese economy. [ Trading of Japanese stocks (spot trading) by investor group ] [ TOPIX Revision Index ] (JPY 100 billion) Annual (JPY 100 billion) Monthly Net purchases Net sales Note: The first and second sections combined Source: Made by MHRI based upon Tokyo Stock Exchange Trust banks (pension funds, etc.) Corporates Investment trusts Individuals Overseas investors /6 17/9 17/12 18/3 18/6 Note: Revision index = (number of issues revised upward number of issues revised downward) / total number of issues revising earnings estimates Source: Made by MHRI based on Thomson Reuters 22

24 6. Forex market trends: JPY/USD exchange rates limited upside, while USD/EUR exchange rate continues to fall The upside of JPY/USD exchange rates is limited as US-China trade friction and the Turkey shock dampened global risk tolerance. The USD/EUR exchange rate fell reflecting the difficult progress in budget debate in Italy and its spillover effect on the European financial sector. The upside of JPY/USD exchange rates appears limited for the time being. Ahead of the US Treasury Department s release of the report on Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States (October) and US midterm elections (November), market participants are concerned regarding the US administration s stance on the strength of the dollar, creating an environment that keeps the yen from weakening further. Watch for further falls of the USD/EUR exchange rate due to lackluster economic fundamentals and rising concerns over developments in peripheral countries in the Euro area. [ JPY/USD exchange rate and comments by US President Trump ] [ USD/EUR exchange rate and Germany-Italy rate spread ] Source: Made by MHRI based upon Bloomberg Source: Made by MHRI based upon Bloomberg 23

25 7. The crude oil market: the upside dampened by EM concerns and US-China trade friction Crude oil prices fell further against the backdrop of the Turkish lira shock. The weakening of crude oil prices was triggered by US officials comments taken to suggest exemptions of sanctions against Iran. Subsequently, concerns regarding downward pressures upon the economy due to US-China trade friction led to the weakening of crude oil prices. In August, crude oil prices fell further in the wake of the Turkish lira shock. The immediate supply-demand of crude oil is showing an excess of supply, which is likely to check the upside for the time being. Concerns regarding the EM economies triggered by the Turkish lira shock and US-China confrontation over trade are weighing down crude oil prices as demand-dampening factors. [ Crude oil prices ] [ Crude oil supply-demand and crude oil prices ] Source: Made by MHRI based upon Thomson Reuters Source: Made by MHRI based upon EIA 24

26 8. Outlook on the financial markets Sub-scenario 1 (upside scenario) Long-term interest rates and stocks rise on heightened interest rate hike expectations driven by the acceleration of US economic recovery. The dollar continues to strengthen against the yen. Sub-scenario 2 (downside scenario) Global economic slowdown, including Europe and the US, due to tariff hikes accompanying US protectionism. Long-term interest rates fall and stock prices fall. The dollar continues to weaken against the yen. 25

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